THE IMPACT OF COVID RELIEF ON LEASES AND RELATED NEGOTIATIONS
Much has been made of the Covid relief on rent and the entitlement of most tenants to receive a rent abatement proportionate to their reduction in turnover.
Generally, half of that Covid relief is deferred rental and the other half is forever waived. That leads us to the immediate issue of having to recover the deferred rental after the end of the Covid period.
The recovery of debts from anybody is a substantial topic in its own right, but for the moment, what we will have is the tenant’s obligation to pay full rent being reinstated together with an obligation to repay the debt that they have run up over the last 6 months.
The practical reality is if the tenant has been unable to pay the rent for the last 6 months then they will be hard pushed even paying the full rent now, let alone paying any of the deferred rent. Part of our management process needs to involve efficiently working with the tenant back to payment of full rental and thereafter managing the recovery of the deferred rent.
Security and Clarifying Arrangements
As lawyers, particularly acting for people that are owed money (landlords) we would invariably like to see some form of security for that repayment. There is nothing in the Covid Principles prohibiting the landlord from seeking or taking security for moneys that are owing. However, given that we are midway through an existing lease the prospect of getting security seems slim. This is an important part of the negotiating process and we are currently acting for a number of landlords that do have security in place which has proved enormously valuable for them.
We have also acted for many landlords in preparing Covid relief deeds which outline repayment dates, amounts and so on so that there is no ambiguity about the tenant’s obligations. We recommend they be entered to tidy up arrangements with tenants. It may be very timely to be doing this if the tenants are looking for some form of renewal of renegotiation of the lease.
That deed will clearly specify the repayment dates, deal with security if the tenant is willing to offer any, might require a director’s guarantee and may deal with any variations to the lease.
Be careful however as the Covid relief principles probably do not contemplate the landlord securing additional security or advantages such as additional guarantees or security and the tenant would be well within their rights to refuse, unless they are seeking some other form of concession from the landlord or the lease has expired or there is some other substantial change occurring.
What to do with recalcitrant tenants
Across the board landlords are having to struggle with what covid relief is available to them for tenants who cannot or will not pay the rent. We have seen an increase in opportunistic tenants using the Covid period as an excuse to not pay rent in the misguided belief that they are fully protected from any remedies by the landlord. This is simply not true. Many of the landlords normal remedies are still available except to the extent of the specific Covid relief provided under the Leasing Principles. So, for those tenants who probably can but simply will not pay the rent, the normal recovery procedures are available and should be implemented.
The bigger problem for property managers is how to deal with the tenants who cannot pay the rent. This is a commercial decision for the landlord in that some rental is better than none. It is a matter of assessing the landscape and taking advice from yourselves as to whether there is any real prospect of getting another tenant at a higher rent. If there is not then one might as well persevere with the current tenant and support them through the difficult period, especially if you can negotiate for the unpaid rental to be a deferral and recoverable later. This would also be an opportune time to arrange security, guarantees and indemnities if they are not currently held.
These negotiations might also give a landlord the opportunity to secure for themselves, for example, lessee’s fixtures and fittings, plant and equipment and other items that might be useful in trying to relet the premises in the event of the tenant’s failure down the track. We have been advising landlord’s on this issue and the ability to hang onto those items. Allowing the transfer of a ‘going concern’, we believe, makes the premises much more rentable or saleable – as the case may be.
This leads to registration requirements and we need to advise lessors about registration of mortgages over leases, PPSR charges and other rights to protect their interests, if they can be negotiated.
In normal times the usual remedy of a Form 7 Notice of Breach with the threat of lockout of the tenant is sufficient to bring the tenant into line or to get the premises vacated so they can be leased to another person.
We are not sure that that is a good remedy in the current environment where there seems little appetite to take over new premises. There are other alternative methods of encouraging a tenant to pay their rent, quite apart from the sledgehammer approach of terminating the lease and evicting them.
Some of these would include:
- The issue of a statutory demand if the tenant is a company. This can be a powerful tool and may lead to the winding up of the tenant if they do not deal with it quickly. This then might provide the landlord the opportunity to look at the sale of the whole of the business as a going concern including tenant’s fixtures and fittings together with the new lease in the event of a liquidation of the company. As the landlord has the power to appoint a liquidator, he has some control over this process as well.
Traditionally, statutory demands had to be answered within 30 days but with the Covid relief this has s been extended to 6 months.
2. A court judgement. It is a relatively simple process to issue a Claim and Statement of Claim for rent owing. Such a claim is normally difficult to contest by the tenant so one would expect you would either get summary judgement or a judgement by consent. Once judgement is obtained this opens up recovery options, including:
- Garnishee – where you can get a tenant’s debtors to pay the landlord directly;
- Execution against assets. Iff you know of any assets that they own including plant, fixtures and fittings in the premises then you can secure against these and sell them for repayment of the debt. This may allow for the sale of the business as a going concern to the substantial benefit of the landlord.
- Personal sureties. These are often very powerful. Normally there will be a director’s guarantee which allows you to get the same remedies against the directors and then you get exposure to their assets as well in trying to recover the arrears of rent. Most directors are very reluctant to allow it to get to that stage and will enter serious negotiations to settle the debt before they get to the judgement stage. If they do not, there are the remedies against them including examination processes to identify their personal assets and debtors and ceasing those assets and debtors as needed to satisfy the judgement.
Most guarantees are a guarantee and indemnity. An indemnity is a separate legal obligation directly from the indemnifier to the landlord. It will usually say something like ‘I indemnify the landlord from any loss or damage (effectively a failure to receive the rent as stated in the lease) arising from any cause whatsoever, regardless of whether the lease is unenforceable or void or any defect or failing by the tenant. This is powerful tool. For example, with the recent Covid relief for rent, even though the tenant may be entitled to a deferral of half the rent abatement, I do not believe that necessarily extends to the indemnifier.
Remember that these third-party obligations, particularly directors guarantees and deeds of indemnity, are actually very fragile documents. Any variation of the underlying arrangements may well invalidate such guarantees and indemnities so please ensure that if there are any changes to the arrangements on a lease, which has a guarantee and/or indemnity then make sure that that guarantor is involved in those negotiations and discussions and consents to and signs off on those variations, otherwise, they may well be released from their guarantee and indemnity obligations.
The same may well be said of any bank guarantees. They are after all a very simple form of guarantee from a third party of principle obligations. The law of guarantees is clear that if those principle obligations are varied then this may well discharge the guarantor, in this case including the bank.
Other tenants obligations
There are some 40 clauses in a standard lease and every one of them deals with a different issue and almost invariably they impose obligations on the tenant. Some of the biggest obligations that are overlooked include:
- Repair and maintenance obligations.
- The redecoration obligation which often will arise every 3 or 5 years.
- Refurbishment and reinstatement obligations at the expiry of the lessee. Often this can run to hundreds of thousands of dollars.
These issues need to be considered when we are considering the financial viability of a tenant and its ability to meet the lease obligations going forward. Many tenants may not be aware of these substantial but hidden liabilities, but it is important that we, acting for landlords, do not lose sight of them or do anything that might interfere with the landlord’s ability to recover on them.
These issues must always be kept top of mind when renegotiating leases, extensions, or variations.